SUB CATEGORIES Featured Story |  Straight Talk |  The Stage | 

There’s more than meets the eye

21 June 2016 Myra Knoesen
Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

A hidden significance, greater than is first apparent, as in this agreement involves more than meets the eye. In a recent determination by the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud), the complainant accuses the respondent of acting negligently in failing to provide appropriate cover.

Mum’s the word

Peter Joseph Harten, the complainant, was covered for permanent disability in terms of a contract of insurance between Harten and Associates and Mutual & Federal Insurance. At that time the stated benefit cover for death and permanent disability, for Harten, was three times the declared earnings of R200 000, making the policy benefit R600 000.

In October 2006 Harten and Associates sold its book of short-term insurance to the respondents (Walter Kranz Insurance Brokers – the first respondent and Walter Kranz – the second respondent). Included in this book was the policy in question.

On 25 September 2007, the parties met to discuss the renewal of the policy. At that time the cover in question was provided in the policy under “Stated Benefits” (SB). Kranz pointed out, at this meeting, that there were disadvantages to this as this type of cover is subject to any payments made by Workman’s Compensation, and accordingly payments, in the event of risk, may take a long time to process. He recommended that the basis of the cover be changed to “Group Personal Accident” (GPA).

Harten accepted this advice and further instructed Kranz to increase cover from R200 000 per annum to R300 000 as declared earnings. This meant that three times the declared earnings would result in cover of R900 000, representing an increase from R600 000 to R900 000.

Kranz amended the policy to GPA, but according to Harten, failed to adjust the benefit cover as instructed. He states that Kranz caused the benefit to be reduced from R600 000 to R300 000. At the time, Harten was unaware that this reduction in benefit had taken place.

On 9 October 2007 Kranz sent Harten an e-mail confirming that the changes to the policy had been made. However, Harten says there was no indication that the sum insured was now reduced from R600 000 to R300 000. Nor was there any indication that the instruction to increase cover to R900 000 was not carried out.

Sitting on the fence

On the 3 August 2008 Harten had a bicycle accident which rendered him a paraplegic. In May 2009 a neurologist certified that he was permanently disabled. Mutual & Federal accepted his claim and paid an amount of R300 000. However, Harten says he was expecting R900 000.

On 3 July 2009 the parties met and Harten pointed out that there must have been an error as the payment benefit was very low and not what he expected from the policy. Accordingly, he was looking to Kranz to compensate him for the shortfall seeking payment in the amount of R600 000; the difference between what he should have received (R900 000) and the reduced benefit paid in terms of the policy (R300 000).

He filed a complaint with the Office stating that Kranz recommended changes to his policy and in doing so acted negligently in failing to provide appropriate cover.

The other side of the story

Kranz denies that there was any misrepresentation or negligence in the advice given to Harten. According to Kranz, Harten already had a policy issued by Mutual and Federal. He says he was not involved in advising Harten to purchase this policy. He only became involved in giving advice after the latter took over the short-term insurance portfolio of Harten and Associates in October 2006.

The first occasion when advice was given was at the meeting which took place on 25 September when the terms of renewal were discussed. It was at this meeting that Kranz advised Harten to change cover from SB to GPA. The reason for this advice as stated above was that benefits under SB were subject to a reduction by any amount paid under workman’s compensation.

According to Kranz, Harten was also advised to increase cover but he indicated that he did not “wish to pay any additional premium on this policy”. Kranz explained the difference between cover under SB and GPA to Harten who understood it. It is not disputed that Harten accepted the advice and instructed Kranz to make the changes. Accordingly, Kranz mentions that Harten was an experienced FSP in his own right and did not require any explanation.

Harten has about 25 years’ experience in the short-term insurance industry and was well aware of the difference between the two benefits. It was not necessary to explain the difference to him. Further, he accepted the reduced pay out provided by the replacement benefit.”

He further points out that on 9 October he sent a letter to Harten detailing the changes made to the policyand the reduction in cover. The policy clearly specified cover in the amount of R300 000 in respect of permanent disability of Harten. Having received this summary of insurance, Harten made no request to change cover from GPA back to SB.

It makes even less sense that respondent should receive instructions to increase the income only for the purpose of reducing the cover from an existing R600 000 to R300 000.

We summarised the determination for you but you can download the original determination here and read more on the findings and final outcome.Interestingly, in the determination, the FAIS Ombud finds that Kranz possibly failed to notice that the wrong amount was loaded.

In closing, the FAIS Ombud ordered the respondents to pay Harten the amount of R600 000.

Editor’s Thoughts

Even though Kranz sent a detailed letter specifying the amount of cover and changes made to the policy Harten accepted the terms. Clearly if he accepted these terms, as an FSP, he understood the policy. Even if Kranz loaded the wrong amount, as the FAIS Ombud pointed out, should Harten not have picked this up and corrected Kranz? In this case, can we say that Harten was accountable for his own fate? Kranz’s core defense would have been records of advice; however, he admitted he did not keep records of advice. This once again, points out the importance of keeping records of advice. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Wally Walton, 21 Jun 2016
How vague is all of this. Surely it will be helpful if FSP or Ombud actually refer to what the cover was based on such as 3 years earnings. If so then you cannot replace with one flat amount based on 1 year's new estimate.
We shoot ourselves in the foot and then blame the Ombud
Report Abuse
Added by CA, 21 Jun 2016
I was interested to see what other advisors thought. Seems ludicrous that you sue the person who bought your practice? I had to read the article twice!
The complainant should have known better and he wanted to pay the same premium for the more comprehensive cover? Typical client! I hope the advisor appeals this. The broker was actually helping the claimant by highlighting the shortfall in cover!
But it just shows how vulnerable we are. Wouldn’t the letter/email explaining the cover be seen as a ‘record of advice’?

Report Abuse
Added by Cynical Simon, 21 Jun 2016
It would appear that all sanity has gone out the backdoor! For brokers there is no place to hide as common law had apparently been rewritten with one big condition: No mercy for Brokers and the customer is always right..
Report Abuse

Comment on this post

Email Address*
Security Check *
Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now